What I say unto you I say unto all, watch. Mark 13:37

June 03, 2011

China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills

China has dropped 97 percent of its holdings in U.S. Treasury
bills, decreasing its ownership of the short-term U.S. government securities
from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the
most recent month reported by the U.S. Treasury.

Treasury bills are securities that mature in one year or less
that are sold by the U.S. Treasury Department to fund the nation’s debt.

Mainland Chinese holdings of U.S. Treasury bills are reported
in column 9 of the Treasury report
linked here.

Until October, the Chinese were generally making up for their
decreasing holdings in Treasury bills by increasing their holdings of
longer-term U.S. Treasury securities. Thus, until October, China’s overall
holdings of U.S. debt continued to increase.

Since October, however, China has also started to divest from
longer-term U.S. Treasury securities. Thus, as
reported by the Treasury Department, China’s ownership of the U.S. national
debt has decreased in each of the last five months on record, including
November, December, January, February and March.

Prior to the fall of 2008, according to
Treasury Department data, Chinese ownership of short-term Treasury bills was
modest, standing at only $19.8 billion in August of that year. But when
President George W. Bush signed legislation to authorize a $700-billion bailout
of the U.S. financial industry in October 2008 and President Barack Obama signed
a $787-billion economic stimulus law in February 2009, Chinese ownership of
short-term U.S. Treasury bills skyrocketed.

By December 2008, China owned $165.2 billion in U.S. Treasury
bills, according to the Treasury Department. By March 2009, Chinese Treasury
bill holdings were at $191.1 billion. By May 2009, Chinese holdings of Treasury
bills were peaking at $210.4 billion.

However, China’s overall appetite for U.S. debt increased
over a longer span than did its appetite for short-term U.S. Treasury bills.

In August 2008, before the bank bailout and the stimulus law,
overall Chinese holdings of U.S. debt stood at $573.7 billion. That number
continued to escalate past May 2009-- when China started to reduce its holdings
in short-term Treasury bills--and ultimately peaked at $1.1753 trillion last
October.

As of March 2011, overall Chinese holdings of U.S. debt had
decreased to 1.1449 trillion.

Most of the U.S. national debt is made up of publicly
marketable securities sold by the Treasury Department and I.O.U.s called
“intragovernmental” bonds that the Treasury has given to so-called government
trust funds—such as the Social Security trust funds—when it has spent the trust
funds’ money on other government expenses.

The publicly marketable segment of the national debt includes
Treasury bills, which (as
defined by the Treasury) mature in terms of one-year or less; Treasury
notes, which mature in terms of 2 to 10 years; Treasury Inflation-Protected
Securities (TIPS), which mature in terms of 5, 10 and 30 years; and Treasury
bonds, which mature in terms of 30 years.

At the end of August 2008, before the financial bailout and
the stimulus, the publicly marketable segment of the U.S. national debt was 4.88
trillion. Of that, $2.56 trillion was in the intermediate-term Treasury notes,
$1.22 trillion was in short-term Treasury bills, $582.8 billion was in long-term
Treasury bonds, and $521.3 billion was in TIPS.

At the end of March 2011, by which time the Chinese had
dropped their Treasury bill holdings 97 percent from their peak, the publicly
marketable segment of the U.S. national debt had almost doubled from August
2008, hitting $9.11 trillion. Of that $9.11 trillion, $5.8 trillion was in
intermediate-term Treasury notes, $1.7 trillion was in short-term Treasury
bills; $931.5 billion was in long-term Treasury bonds, and $640.7 billion was in
TIPS.

Before the end of March 2012, the Treasury must redeem all of
the $1.7 trillion in Treasury bills that were extant as of March 2011 and find
new or old buyers who will continue to invest in U.S. debt. But, for now, the
Chinese at least do not appear to be bullish customers of short-term U.S. debt.

Treasury bills carry lower interest rates than longer-term
Treasury notes and bonds, but the longer term notes and bonds are exposed to a
greater risk of losing their value to inflation. To the degree that the $1.7
trillion in short-term U.S. Treasury bills extant as of March must be converted
into longer-term U.S. Treasury securities, the U.S. government will be forced to
pay a higher annual interest rate on the national debt.

As of the close of business on Thursday, the total U.S. debt
was $14.34 trillion, according to the
Daily Treasury Statement. Of that, approximately $9.74 trillion was debt
held by the public and approximately $4.61 trillion was “intragovernmental”
debt. †